Fixer-uppers have allure of their own

May 11, 2001|By Robert Bruss, Tribune Media Services.

If you're having trouble buying a home during this peak home-sales season, consider purchasing a fixer-upper. You'll find competition from other buyers is virtually nil for "fixers" because most home purchasers don't want to tackle fix-up work.

Definitions of fixer-upper houses vary greatly from a rundown "shack" to a house that needs minor updating. As an investor, I think fixer-upper houses offer the best profit potential because they can usually be purchased below market value, fixed up, and profitably held or resold.

The worst fixer-upper house I ever purchased was in the heart of a nice middle-class neighborhood. It had been condemned by the city with an "uninhabitable" red tag on the front door after a visiting nurse reported the horrible conditions she observed when checking on a patient who lived there.

I had driven by that rundown house many times. I even tried to contact the owners, without success.

One day I received a phone call from Doug, a nearby Realtor, who asked if I wanted to buy a fixer house. He had located the owners, who were living in a boarding house about 30 miles away after the city forced them to move out.

When I inspected the house, I couldn't believe the roof had large "open-air skylights" where rain and leaves entered into the bedroom and living room. Until a few weeks earlier, the owners had been living there.

Although Doug didn't have a written listing, he told me the price the owners wanted. Essentially, they were asking for the lot value. He added his sales commission, and we arrived at my all-cash no contingency purchase offer. The next day, Doug phoned to tell me the sellers accepted.

Construction loan

When I went to my bank to get a loan to buy that house, they treated it as a construction loan. Their appraiser appraised the house as it was (my purchase price) and as what the house would be worth after fix-up (based on recent, comparable neighborhood sales prices of homes in good condition).

I spent about $50,000 fixing up that house and earned a net profit of almost $100,000 when I resold it a few years later. Yes, it involved w-o-r-k (oops, sorry to use that dirty four-letter word in a family newspaper).

After I fixed up the house, the bank even featured it on the cover of their newsletter to showcase their community investment program.

Can you keep a secret? The most profitable fixer-uppers don't need major rehab, such as the house I described as my worst fixer-upper experience. Instead, most fixer houses only need cosmetic fixup. Examples include interior and exterior paint (by far, the most profitable fix-up improvement), new light fixtures, cleaning, repairing, recarpeting and fresh landscaping.

The secret of profitably buying a fixer-upper house is to purchase it for at least 20 to 30 percent below what the house will be worth after fixup. Don't even consider fix-up houses that need room additions, such as a family room, or major renovation, such as a new kitchen. The best fix-up bargains are sound, well-located ordinary houses that are "tired" and haven't been updated for at least 20 years.

When making a purchase offer for a fixer-upper, for your protection include a contingency clause for a professional inspection. After the seller accepts your purchase offer, be sure to accompany your inspector.

Hire an inspector who is a member of the American Society of Home Inspectors (www.ashi.com). If an unexpected defect proves to be major but the seller refuses to pay for the work, you can then cancel the purchase and get your deposit refunded.